Now it's the grandparents who are saving in 529 plans

66% are chipping in a significant amount to their grandchildren's education

As parents across the country struggle to save up for the soaring costs of college, some may be overlooking a surprisingly lucrative fundraising strategy: guilt-tripping the grandparents.

About two-thirds of grandparents whose grandkids plan to attend college in the future are chipping in financially to support their education, according to a March 11 study by Legg Mason Inc. This compares to 39% who are contributing to the costs of grandchildren now in college.

Meanwhile, a rapidly increasing number of grandparents — about 40% — have made Section 529 plans their college savings tool of choice, providing the benefits of tax-advantaged withdrawals.

"When we asked whether grandparents used 529s to save for their own children's needs, only 10% said yes. But a generation later, as today's grandparents become more investment savvy and 529s are more established, we are seeing an increased reliance on them," John Kenney, head of Legg Mason's global asset allocation group, said in a press release.

About 30% of today's grandparents feel that contributing some amount of money to grandchildren's education is “extremely” or “very important.” Another 26% said that it is “somewhat important,” according to the survey.

Typically, grandparents' contribution is modest, with only 20% planning to cover more than half of grandchildren's tuition expenses. However, that figure rises to 50% among respondents with annual incomes of more than $200,000.

Among those who aren't contributing, about 40% feel that covering grandchildren's college costs is the parent's responsibility. Another 28% say they just don't have the money, the survey said.

For grandparents — and others — who do want to help out, 529 plans are increasingly popular. The amount of assets in 529 college savings plans as of the fourth quarter of 2013 was $204.5 billion, a 21.3% increase from a year earlier, according to data from Strategic Insight, an Asset International Company.

Nonetheless, grandparents aren't taking as much advantage of the plans as they could be. Despite the growth in use of 529s, more than half of respondents to the Legg Mason study still cover grandchildren's college costs by drawing down cash. Another 45% are emptying investment accounts, and 30% are using savings accounts and CDs.

The main reasons 529 plans aren't seeing more use is lack of knowledge. Only 16% of respondents feel knowledgeable or very knowledgeable about how these plans work, according to the survey. For example, 72% didn't know that 529 accounts can be invested in plans outside of their home state. And a full 82% didn't know that unused funds could be applied to the contributor's own continuing education.

In part, this uncertainty stems from lack of communication with financial advisers. Nearly half of respondents said they never sought outside advice on college savings, and only 20% said a financial adviser was the first to bring 529 plans to their attention.

"There's more room for grandparents and financial advisers to work together to ensure grandparents understand how 529 plans fit in," Mr. Kenney said in a statement. "That means making sure grandparents grasp how a 529 plan could enhance their personal wealth management strategy."